China s Balance of Payments Report

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1 2014 China s Balance of Payments Report BOP Analysis Group State Administration of Foreign Exchange 1

2 Contents Abstract... 3 I. Overview of the Balance of Payments... 5 (I) The Balance-of-Payments Environment... 5 (II) The Main Characteristics of the Balance of Payments... 8 (III) Evaluation of the Balance of Payments II. Analysis of the Major Items in the Balance of Payments (I) Trade in goods (II) Trade in services (III) Direct investments (IV) Portfolio investments (V) Other investments III. International Investment Position Ⅳ. Operation of the Foreign Exchange Market and the RMB Exchange Rate (Ⅰ) Trends in the RMB Exchange Rate (II) Transactions in the Foreign Exchange Market Ⅴ. Outlook for the Balance of Payments

3 Abstract In 2014 the global economy continued to recover slowly, with differentiated economic performance and monetary policies in various countries and surging fluctuation in international financial markets. The Chinese economy grew at a reasonable rate. The government steadily promoted reform and structural adjustments, and the RMB exchange rate experienced more significant two-way fluctuations. China s balance of payments was moving in a generally balanced direction amidst fluctuations. The current account surplus totaled USD billion, up by 48 percent year on year. The ratio of the current account surplus to GDP was 2.1 percent, which by international standards was considered reasonable. In particular, the trade in goods surplus grew by 32 percent whereas the trade in services deficit increased by 54 percent. In the meantime, cross-border capital flows fluctuated significantly. As in 2013 the first quarter continued to record net inflows, with the surplus totaling USD 94 billion. However, the capital and financial account recorded a deficit in the following three quarters, with a total deficit of USD 55.7 billion due to the changing economic and financial situations both domestically and internationally and the two-way floating RMB exchange rate since the second quarter. More specifically, direct investments continued to record net inflows whereas non-direct 3

4 investments, such as portfolio investments and other investments, changed from net inflows to net outflows, driven by the strengthened willingness to hold foreign exchange and the increase in repayment of the external debt. In 2014 China s reserve assets increased by USD billion, down by 73 percent year on year, which accounted for 1.1 percent of GDP, 3.4 percentage points lower than the ratio in In 2015 China s balance of payments are projected to maintain a surplus in the current account and two-way fluctuations in the capital and financial account. The SAFE will actively adapt to the new normal of the balance of payments, promote trade and investment facilitation and foreign exchange market development, propel key reforms for capital account convertibility, construct an external debt and capital flow management system in the context of macro prudential management, and improve foreign reserve management with the goal of achieving a general BOP balance and guarding against shocks from cross-border capital flows. 4

5 I. Overview of the Balance of Payments (I) The Balance-of-Payments Environment In 2014 China faced complicated and difficult situations both domestically and internationally. The global economy was recovering with twist and turns, and the domestic economy was growing within a reasonable range with increased downward pressures. The two-way floatation of the RMB exchange rate surged remarkably and the balance of payments was moving in the direction of a general equilibrium amidst fluctuations. Internationally, the global economy maintained a trend of unbalanced recovery, with varying economic performance in the different economies (see Chart 1-1) and a diversified monetary policy in various countries. Economic growth in the United States first declined and then increased, along with the general trend of a strong recovery, and the U.S. employment market was improving. The FED gradually reduced debt purchases and the quantitative easing policy came to the end in October. The Euro zone remained troubled by negative factors, such as deflation and a high unemployment rate, and its economic growth still hovered at a low level. Japan also turned to a negative growth for three quarters beginning with the second quarter. Both the Euro zone and Japan further strengthened their loose monetary policies. Some emerging economies 5

6 faced multiple difficulties, such as insufficient endogenous growth, dropping asset prices, and even capital outflows, which forced them to choose between economic stimulation and restraining capital outflows in terms of their monetary policies. More complicated monetary policies and low global growth rates contributed to fluctuations in international financial markets. On the one hand, major stock and bond markets went up, with more significant fluctuations in the second half of the year. On the other hand, the US dollar began to appreciate, whereas the other currencies and prices of staple goods dropped (see Chart 1-2). Chart 1-1 Quarterly growth rates of the major economies, Note: The U.S. growth rate is the annualized quarterly growth; the growth rates of the other countries are the quarterly growth rates year on year. Source: CEIC. 6

7 Chart 1-2 Indices of stocks, bonds, goods, and money markets, Note: Year 2012=100 Source: Reuters. Domestically, China s economic and social development was steady, despite some difficulties and challenges. The positive factors were due to the high GDP growth rate, the low CPI (see Chart 1-3), and the steady employment market. In addition, the industrial structure was improved and the share of final consumption expenditure to growth increased (see Chart 1-4). The floating zone of the RMB exchange rate expanded and the elasticity of exchange rate increased, which played a more important role in the balance of payments. However, there were also some negative factors, including weak investment and a lack of new consumption hot spots, making it more difficult to realize steady growth. Against the background that China had to deal simultaneously with the slowdown in economic growth, making difficult structural adjustments, and absorbing the effects of the previous economic stimulus policies, there were 7

8 potential risks in some areas and market participants accelerated the currency structural adjustments of their assets and liabilities. Chart 1-3 Quarterly GDP and monthly CPI growth rate, Source: CEIC. Chart 1-4 Contributions to economic growth, Source: CEIC. (II) The Main Characteristics of the Balance of Payments The balance of payment recorded a twin surplus. In 2014 the BOP surplus amounted to USD billion, down by 48 percent year on year (see Table 1-1). In particular, the current account surplus was USD

9 billion, an increase of 48 percent year on year, 1 and the capital and financial account surplus was USD 38.2 billion, a decrease of 89 percent year on year. The trade in goods surplus grew rapidly. Based on the balance-of-payments statistics, 2 China s exports and imports of trade in goods amounted to USD billion and USD billion, up 6 percent and 1 percent respectively, and the surplus was USD 476 billion, up 32 percent year on year (see Chart 1-5). Table 1-1 The structure of the BOP surplus, In 100 million USD Items BOP balance Current account balance As a % of the BOP balance % 55% 45% 34% 117% 30% 85% As a % of GDP 9.3% 4.9% 4.0% 1.9% 2.6% 1.6% 2.1% Capital and financial account balance As a % of the BOP balance 9% 45% 55% 66% -17% 70% 15% As a % of GDP 0.9% 4.0% 4.8% 3.6% -0.4% 3.6% 0.4% Sources: SAFE, NBS. The deficit in trade in services continued to expand. In 2014 trade in services revenue totaled USD billion, decreasing 7 percent year on 1 In 2013 the BOP was revised according to the latest d data. After the revision, the BOP surplus was USD billion. In particular, the current account surplus was USD billion, a decrease of USD 34.6 billion from the previous release of the BOP. The capital and financial account surplus was USD billion, an increase of USD 19.9 billion from the previous release of the BOP. The major adjustment came from foreign shareholders accrual profits and unremitted profits based on the annual survey of FDI enterprises, which led to an increase of USD 35.4 billion in both income outflows and FDI inflows. 2 The BOP statistics and the statistics of the General Administration of Customs with respect to trade in goods can be reconciled by the following: First, imports based on the BOP statistics equal 95 percent of the imports based on the customs statistics by quoting the CIF and assuming 5 percent to be insurance and freight. Second, the BOP statistics include goods repatriation, goods purchased at ports, and smuggled goods that are deducted from the import and export returns. 9

10 year; trade in services expenditures totaled USD billion, increasing 16 percent; and the deficit of trade in services was USD 192 billion, an increase of 54 percent, among which the transportation deficit increased by 2 percent and the travel deficit continued to increase at a rate of 40 percent year on year (see Chart 1-5). Chart 1-5 Major items under the current account, Source: SAFE The deficit in income decreased. In 2014 income revenue totaled USD 213 billion, up by 16 percent year on year; income expenditures totaled USD billion, down by 6 percent; and the deficit was USD 34.1 billion, down by 57 percent. In particular, employee compensation recorded a surplus of USD 25.8 billion, up by 60 percent, and investment income recorded a deficit of USD 59.9 billion, down by 37 percent (see Chart 1-5). However, the deficit in investment income did not represent a loss of China s outward investments. Instead, in 2014 China s outward 10

11 investments recorded revenue of USD billion, an increase of 10 percent year on year. Foreign investment profits and dividend expenditures totaled USD billion, down by 7 percent. The deficit in current transfers surged remarkably. In 2014, current transfer revenue amounted to USD 41.1 billion, decreasing 23 percent year on year; current transfer expenditures totaled USD 71.4 billion, increasing 15 percent year on year; and the current transfer item recorded a deficit of USD 30.2 billion, 2.5 times the deficit in 2013 (see Chart 1-5). Current transfers include donations, compensation, social security, taxes, penalties, and lotteries. Since 2013, current transfers changed from a surplus to a deficit, reflecting the increase in donations from residents to nonresidents due to improvements in resident income. Net inflows of direct investments decreased slightly. Based on the BOP statistics, the surplus in direct investments totaled USD billion, a decrease of 4 percent year on year (see Chart 1-6). In particular, outward direct investments recorded a net outflow of USD 80.4 billion, representing growth of 10 percent, and inward direct investments 3 recorded net inflows of USD billion, down by 1 percent. 3 Unlike the data released by the Ministry of Commerce, direct investments based on the BOP statistics also include unpaid and unremitted profits, retained earnings, shareholder loans, foreign capital utilized by financial institutions, and real estate bought by non-residents. 11

12 Chart 1-6 Major items under the capital and financial account, Source: SAFE Net inflows of portfolio investments surged. In 2014 net inflows of portfolio investment amounted to USD 82.4 billion, up by 56 percent year on year (see Chart 1-6). In particular, outward portfolio investments recorded a net outflow of USD 10.8 billion, an increase of 102 percent year on year; inward portfolio investments recorded a net inflow of USD 93.2 billion, an increase of 60 percent. Other investments changed from net inflows to net outflows. In 2014 other investments recorded a net outflow of USD billion, whereas in 2013 they had recorded a net inflow of USD 72.2 billion (see Chart 1-6). In particular, assets such as lending, trade credits, and deposits recorded a net increase of USD 303 billion, up by 113 percent year on year. Liabilities such as debts, trade credits, and deposits recorded a net increase of USD 50.2 billion, down by 77 percent. The growth rate of reserve assets slowed down. The increase in reserve 12

13 assets in 2014 totaled USD billion, a decrease of 73 percent year on year. In particular, foreign reserve assets increased USD billion, which represented a decreased growth rate of 73 percent year on year. By the end of 2014, China s foreign reserve position was USD 3843 billion (see Chart 1-7), an increase by USD 21.7 billion from its position in 2013 and a decrease of USD 488 billion compared with the increase in The increase in the foreign reserve position was USD 97.1 billion less than the increase in foreign reserve assets, reflecting the valuation effects without cross-border capital flows due to the exchange fluctuations in the major currencies as well as the asset prices in international markets. Chart 1-7 Foreign reserve position and growth, Note: The increase in foreign reserves is driven by transactions, but excluding the valuation effect. Source: SAFE 13

14 Table 1-2 China s Balance of Payments Statement in Unit: USD 100 million Item Balance Credit Debit I. Current account 2,197 27,992 25,795 A. Goods and services 2,840 25,451 22,611 a. Goods 4,760 23,541 18,782 b. Services -1,920 1,909 3,829 1.Transportation Travel -1, ,649 3.Communication services Construction services Insurance services Financial services Computer and information services Royalties and licensing fees Consulting services Advertising and public opinion polling Audio-visual and related services Other business services Government services, n.i.e B. Income ,130 2,471 1.Compensation of employees Investment income ,831 2,429 C. Current transfers General government Other sectors II. Capital and financial account ,730 25,347 A. Capital account B. Financial account ,710 25, Direct investment 2,087 4,352 2, Abroad , In China 2,891 3, Portfolio investment 824 1, Assets Equity securities Debt securities China s balance of payments statement is compiled in accordance with the principles of the fifth edition of the Balance of Payments Manual of the International Monetary Fund, recording all economic transactions between residents of the Chinese mainland (excluding residents of Hong Kong SAR, Macau SAR, and Taiwan province) and non-residents, based on the principles of a double-entry system. 14

15 Item Balance Credit Debit Bonds and notes Money market instruments Liabilities 932 1, Equity securities Debt securities Bonds and notes Money market instruments Other investment -2,528 19,694 22, Assets -3, , Trade credits Long-term Short-term Loans Long-term Short-term Currency and deposits -1, , Other assets Long-term Short-term Liabilities ,699 18, Trade credits Long-term Short-term Loans ,464 17,807 Long-term Short-term ,953 17, Currency and deposits Other liabilities Long-term Short-term III. Reserve assets -1, , Monetary gold Special drawing rights Reserve position in the fund Foreign exchange -1, , Other claims IV. Net errors and omissions -1, Source: SAFE. 15

16 Box 1: Negative Net Errors and Omissions Do Not Represent Capital Flight Net errors and omissions is a common feature in the balance of payments for every economy. According to international standards, compilation of the balance of payments should follow the double-entry accounting principle. To make the credits always equal to the debits, an item called the net errors and omissions was created in the balance of payments. In China, the compilers use not only the major source data, data from the international-transaction-reporting-system (ITRS), but also supplementary data from Customs, People s Bank of China, and China National Tourism Administration to compile the BOP. Because the data of other government departments and statistical systems may deviate from the BOP concepts, coverage, and recording principles, and because some types of transactions cannot be fully recorded in the departmental statistics, errors and omissions in China s balance of payments cannot be avoided at the aggregate level. China s errors and omissions are always within a reasonable range. According to international conventions, the size of the net errors and omissions usually should not exceed positive or negative 5 percent of the total exports and imports of goods in the BOP statement during the same period. As the volume of international transactions expands, the absolute value of the net errors and omissions will increase correspondingly, and high-frequency data tend to have larger errors than low-frequency data. From 2008 to 2013, the ratio of net errors and omissions to total exports and imports of goods in China s BOP was approximately 2 percent each year. In 2014, the ratio increased to 5.6 percent and 5.9 percent in the third and fourth quarters respectively, but the annual ratio decreased to 3.3 percent (see Chart C1-1). In the advanced economies, there are also net errors and omissions in the BOP statements. For example, in the Q U.S. balance of payments, the current account deficit totaled USD billion, the capital account surplus totaled USD 10.3 billion, the reserve assets increased by USD 0.8 billion, and the net errors and 16

17 omissions recorded a positive USD 94 billion. As a result, the ratio of net errors and omissions to total exports and imports of goods in the second quarter of 2014 was 9 percent. More strikingly, the ratio rockets to 15 percent in the first quarter of Chart C1-1 Net errors and omissions and the ratio o the total exports and imports of goods, Source: SAFE. Negative net errors and omissions do not equal capital flight. First, the direction of the net errors and omissions is not necessarily linked to the direction of the cross-border capital flows. From 2009 to 2013, China s annual balance of payments recorded negative net errors and omissions for four consecutive years. However, during the same period except for 2012, China mainly faced capital inflows and RMB appreciation pressures. Internationally, Japan recorded positive net errors and omissions from 2007 to 2012, as did Germany from 2003 to But both economies experienced exchange rate appreciations and depreciations, as well as large macroeconomic fluctuations during the same periods (see Chart C1-2). Second, negative errors and omissions are due to various complex reasons. They may arise either because we underestimate the capital outflows or because we overestimate the current account surplus. Such incentive mechanisms as FDI policies of rewarding exports and constraining imports in the foreign trade sector and the tolerance of inflows and intolerance of outflows may be the underlying reasons. In recent years, 17

18 the SAFE s inspections have identified that some exporters did not collect, or collected fewer, export proceeds from abroad. The inspections also found that some enterprises claimed larger exports for more government rewards or illegally retained their exports proceeds abroad. Moreover, compared with the increasingly complete external debts statistics, the statistics on external claims are relatively weak. As a result, there may outflows of some unclaimed capital not because they are illegal, but because the current system does not accurately record them. Chart C1-2 Comparison of net errors and omissions across four economies Data: IMF The authorities are managing to improve quality of BOP data. Under the circumstances that new questions and new situations are emerging every day, the SAFE is managing to decrease the size of the net errors and omissions by continuously improving the statistical methodology. For example, the SAFE has launched a new Report on External Assets, Liabilities, and Transactions, which collects not only the external assets and liabilities of the reporters, but also the transactions and non-transaction flows of the external positions. To separately identify non-transaction flows is a key step to control their impact on the quality of the BOP. Meanwhile, to improve the statistics on international travel expenses, the report has started to collect cross-border consumption and cash withdrawals via domestic bankcard. Moreover, in addition to the current enterprise survey and the 18

19 transaction-by-transaction data reporting system, the SAFE is studying sample surveys and estimate methods, so that it can compile more complete, accurate, and reliable BOP data at lower costs. (III) Evaluation of the Balance of Payments Progress was achieved in terms of the balance of payments. In 2014 the ratio of the current account surplus to GDP was 2.1 percent, 0.5 percentage point higher than the ratio in 2013, which was consistent with internationally recognized rational standards (see Chart 1-8). Reserve assets based on the BOP statistics increased USD billion, accounting for 1.1 percent of GDP, a drop of 3.4 percentage points year on year. Chart 1-8 The ratio of the current account balance to GDP and its composition, Sources: SAFE, NBS Cross-border capital flows experienced surging fluctuations. Though China s balance of payments recorded a twin surplus for both the current 19

20 account and the capital account in 2014, cross-border capital flows were changing between surpluses and deficits from quarter to quarter. In particular, the first quarter, as in 2013, registered a net inflow and the surplus of capital and financial account amounted to USD 94 billion. Since the second quarter, the RMB exchange rate fluctuated significantly as well as both the domestic and external economic and financial environments, which led to higher pressures of cross-border outflows and resulted in a situation of a current account surplus and a capital and financial account deficit. During the second, third and fourth quarters, although the trade in goods surplus expanded and the current account surplus increased, the capital and financial account recorded a deficit of USD 16.2 billion, USD 9 billion, and USD 30.5 billion respectively. The major ways to distribute foreign exchange are to encourage holding of foreign exchange by the people and repayment of the debt. Against the background that RMB exchange rate was moving in the direction of an equilibrium and remarkably fluctuating both upward and downward, domestic enterprises and individuals adjusted and optimized their balance sheets. In 2014, newly increased foreign exchange deposits amounted to USD billion, and newly increases foreign exchange loans amounted to USD 20.4 billion (see Chart 1-9). The difference between foreign exchange deposits and loans was utilized by banks in foreign markets, which became the major source of remarkably increased 20

21 external lending and deposits under other investment assets. Foreign assets holdings were diversified among market participants instead of only by the government, whereas they were controlled by domestic entities. Meanwhile, other investment liabilities recorded net inflows of USD 50.2 billion, a drop in the growth rate by 77 percent year on year, reflecting that domestic enterprises had accelerated their repayment of the USD debt. In 2014, outstanding cross-border borrowing for imports decreased by USD 44.9 billion, whereas in 2013 it had increased by USD billion (see Chart 1-10). Chart 1-9 New deposits, loans, and the loan-to-deposit ratio, Source: PBC 21

22 Chart 1-10 Assets and liabilities of other investments, Source: SAFE The BOP adjustment was predictable and acceptable. Along with the reform of the market-oriented RMB exchange rate mechanism, the central bank gradually exited from its normal intervention in the foreign exchange market, which certainly led to an increased trade surplus and more capital outflows. Moreover, more foreign exchange held by the people reflected a growing desire among market participants to hold foreign exchange, which was consistent with the government s reform goal in favor of promoting a foreign exchange supply and demand equilibrium and improving macro controls. Debt deleveraging helped enterprises to relieve the currency mismatches as well as to better face capital flow shocks. More importantly, increased capital outflow pressures since the second quarter did not change the situation of the BOP twin surplus situation for the whole year. Foreign reserve assets continued to increase, with the growth rate 20 percent higher than the growth rate in 2012 when the outflow pressures were also high. 22

23 II. Analysis of the Major Items in the Balance of Payments (I) Trade in goods According to statistics of the General Administration of Customs, trade in goods in 2014 was characterized as the following: Decelerated growth of both imports and exports. In 2014, the total of China s imports and exports grew by 3.4 percent year on year, lower than the growth rate in 2013 (7.6 percent). In particular, exports and imports grew by 6.1 percent and 0.4 percent respectively. The major reasons for the deceleration were weak domestic demand and the drop in the prices of staple goods as well as high trade record in 2013 which was driven by arbitrage trade. According to the estimation of the Ministry of Commerce. 5 after excluding the influence from arbitrage trade in 2013, total exports and imports in 2014 grew by 6.1 percent year on year, among which exports and imports grew by 8.7 percent and 3.3 percent respectively in real terms. Foreign trade dependence (the sum of imports and exports/gdp) further fell to 42 percent, 3 percentage points lower than that in 2013 and 23 percentage points lower than the historical high ratio in 2006 (see Chart 2-1), which indicated the enhanced endogeneity of China s economic growth. 5 See detailed information on the conventional news release by the Ministry of Commerce on January, 21,

24 Chart 2-1 The ratio of China s total volume of imports and exports to GDP, Sources: General Administration of Customs, NBS. Expanded surplus in trade in goods. In 2014 the surplus in trade in goods amounted to USD billion, growth of 47.3 percent year on year. The main reason for the increased surplus was due to the decrease in import prices. Under the circumstances of dropping prices for both domestic industrial products and staple goods in international markets, the import price index for 2014 declined by 3.3 percent year on year. In particular, the volume of crude oil imports grew by 9.5 percent whereas imports grew by only 3.9 percent; the volume of iron ore imports grew by 13.8 percent whereas imports declined by 11.8 percent; and the volume of coal and lignite coal imports decreased by 10.9 percent whereas imports declined by 23.5 percent. Factors such as decelerated growth of domestic demand and decreased trade financing of staple goods influenced the import growth. In 2014, nominal fixed-asset investments increased by 24

25 15.7 percent year on year, 3.9 percentage points lower than the growth rate in For instance, the ratio of trade financing of copper was 89 percent in the first quarter of 2013, but the ratio dropped remarkably in the second half of 2014, with a ratio of 2 percent in the third quarter and a negative ratio in the fourth quarter. The government does not intend to pursue the goal of surplus expansion. However, objectively speaking, the increased surplus did strengthen the capability to protect against capital flow shocks. The ratio of the surplus of trade in goods to GDP was 3.7 percent, higher than the ratio during the previous two years (see Chart 2-1). Improved trade structure. In terms of trade patterns, ordinary trade accounted for 53.8 percent of total trade, which was 2 percentage points higher than the ratio in 2013 and marked an increase for two consecutive years. The contribution of processing trade fell further to 32.8 percent, far less than the ratio in 2005 (nearly 50 percent) (see Chart 2-2). In terms of trade participants, private enterprises accounted for over 70 percent of the total participants, 1.6 percentage points more than the ratio in Trade in goods of private enterprises accounted for 36.5 percent of the total trade, 0.6 percentage point higher than the ratio in With respect to the increased trade in goods, private enterprises accounted for 55.9 percent of the total, indicating that they had become a major source of the growth in trade in goods (see Chart 2-3). 25

26 Chart 2-2 Composition of trade in terms of trade patterns, Source: General Administration of Customs. Chart 2-3 Composition of trade in goods in terms of trade participants, Source: General Administration of Customs More diversified trade partners. The ratio of trade with the developing countries increased 0.4 percentage point year on year. In particular, the growth rate of trade with EMEAP, India, Russia, Africa, and the Middle Eastern European countries was higher than the average rates. Trade with the advanced countries remained stable. Trade with the European Union and the United States grew by 9.9 percent and 6.6 percent year on year. 26

27 Despite the deceleration in the growth rate, it was still higher than the projected global rate and China remained the largest trade in goods country. In 2014 China s market share among its major trade partners, including the United States, the European Union, and Japan, grew slightly, increasing by 0.5 percentage point, 1.4 percentage points, and 0.6 percentage point respectively, and China s share in the export market rebounded for two successive years. Box 2: Rapid development of cross-border receipts and payments of e-commerce driven by overseas online shopping Cross-border e-commerce began to be a new growth engine of foreign trade, with the prevalence of overseas online shopping in China. To adapt to this development, the SAFE launched a foreign exchange pilot policy for cross-border e-commerce payments for payment institutions. The policy aimed to facilitate cross-border e-commerce receipts and payments of foreign exchange. In 2014, there were 22 institutions participating in the pilot program and the receipts and payments via the pilot program grew rapidly. Cross-border online shopping by individuals was surging. In 2014 the sum of receipts and payments of e-commerce business by payment institutions via the pilot program amounted to USD 1.7 billion. Chinese individuals were actively involved in cross-border online shopping. Individual cross-border online shopping, including payment of individual trade in services, totaled USD 1.5 billion, accounting for 88.5 percent of the total receipts and payments. Due to the cooperation of Chinese payment institutions and overseas major retail online shops such as the Macy s, more and more Chinese tried overseas online shopping, which led to increasing payments for 27

28 cross-border online shopping. y In November and December, in particular, driven by sales due to Western holidays and domestic online shopping, individual cross-border online shopping totaled over 0.2 billion per month for consecutive two months. Chart C2-1 Receipt and payments of cross-border e-commerce by payment institutions in 2014 Source: SAFE The privileges of trade in services form cross-border e-commerce gradually emerged. To ensure the authenticity of transactions, the trade in goods and part of the trade in services with real backgrounds are included in the pilot program. In the first half-year of 2014, trade in goods totaled more than trade in services, but in the third quarter trade in services surpassed trade in goods, although in the fourth quarter trade in goods again exceeded trade in services due to the increase in cross-border online shopping since the last quarter during the traditional hot season for shopping. During the entire year, trade in goods accounted for 56.3 percent of the total. In general, trade in goods accounted for more than trade in services, but the privileges of trade in services via e-commerce were emerging and the amount of trade in services in the fourth quarter grew by 6 percentage more than that in the first quarter. The pilot business showed an unbalanced trend of development. The pilot business concentrated on only a few payment institutions. A very few institutions dominated in the trade in services and the businesses of many institutions remained 28

29 underdeveloped. Meanwhile, the privileges of imports over exports were popular and foreign exchange payments dominated the pilot business. Payment institutions had to develop the overseas markets so to introduce foreign consumers to China. To facilitate the development of cross-border e-commerce, the SAFE released the Notice on the Pilot Program on Cross-Border Foreign Exchange Payments and Receipt by Payment Institutions in January 2015, allowing qualified payment institutions to participate om the pilot program and increasing the upper limit for single receipts or payments and expanding the business coverage. (II) Trade in services Trade in services continued to grow steadily and there was significant growth in high value-added trade in. In 2014 trade in services amounted to USD billion, a growth rate of 7 percent year on year, which was 3 percentage points higher than the growth rate for trade in goods. Trade in services accounted for 14 percent of total trade in goods, 0.3 percentage point higher than the ratio in 2013 (see Chart 2-4). According to the WTO World Trade Report, in 2004 the ratio of China s trade in services to that in the United States, Germany, and the United Kingdom was 22 percent, 40 percent, and 42 percent respectively, whereas in 2013, the ratio had been 49 percent, 88 percent, and 114 percent respectively, indicating that China s trade in services was developing rapidly and the differences between China and the advanced countries were narrowing. Guided by the government s policy to optimize the structure of trade in services, high value-added trade in services 29

30 realized rapid development. In 2014, financial services, communications services, construction services, and computer and information services grew by 38 percent, 24 percent, 38 percent, and 25 percent respectively year on year, whereas transportation, as a traditional trade in services, grew by only 2 percent. Chart 2-4 Trade in goods and trade in services, Source: SAFE Receipts from trade in services recorded a historical low level during the last five years. In 2014 receipts from trade in services amounted to USD billion, dropping by 7 percent year on year (see Chart 2-5). In particular, in 2014 offshore merchandise trade recorded a net outflow (a record on the credit side of the balance of payments) of USD 9.5 billion, whereas in 2013 it had recorded a net inflow of USD 22.3 billion. The main reasons for this were the decreased overseas financing related to the delayed payment by domestic enterprises and the increase in payment due. As a result, receipts from other business services totaled only USD

31 billion, a decrease of USD 32.7 billion and 96 percent lower than the amount in Chart 2-5 Trade in services, Source: SAFE Trade in services payments grew rapidly, with travel as the main driving force. In 2014, payments for trade in services totaled USD billion (see Chart 2-5), an increase of 16 percent year on year. In particular, travel payments accounted for 43 percent of total trade in services, 4 percentage points higher than the ratio in 2013, and travel ranked as the top item in trade in services. Transportation payments were the second largest item, but its proportion had dropped consecutively during the last five years, reaching 25 percent in 2014, a decrease of 4 percentage points year on year. Payments of other items remained stable. The deficit in trade in services expanded due to the growth in the travel deficit. In 2014 the deficit in trade in services amounted to USD 192 billion, an increase of 54 percent year on year. Travel accounted for nearly 40 percent of trade in services and was the major source for the 31

32 increase in the deficit in trade in services (see Chart 2-6). Due to the increased disposable income, both the population involved in outbound travel and study and the average expenditure per person grew remarkably. In 2014 travel payments totaled USD billion, an increase of 28 percent, and travel receipts totaled USD 56.9 billion, an increase of 10 percent. The travel deficit amounted to USD billion, a growth rate of 40 percent year on year, accounting for 56 percent of the total deficit in trade in services. Chart 2-6 The ratio of the travel deficit to the deficit in trade in services, Source: SAFE The concentration of the geographic distribution of the deficit trading partners relived but the surplus in trade in services still focused on Hong Kong. In 2014 China recorded a deficit of USD 24.5 billion, with its top ten trading partners with respect to trade in services, decreasing 18 percent year on year. The deficit with the top ten deficit economies totaled USD 75.1 billion, accounting for 40 percent of the total deficit in trade in services, down 20 percentage points year on year. 32

33 In 2014, the largest deficit economies were the United States, Singapore, Korea, and Australia, and the respective deficits totaled USD 17.1 billion, 10.6 billion, USD 9.7 billion and USD 9.4 billion. The surplus with Hong Kong SAR was USD 43.3 billion, up by 36 percent and accounting for 93 percent of the surplus with the economies with which China held a surplus (see Chart 2-7). Chart 2-7 Trade in services with China s major trading partners, 2014 Source: SAFE Box 3: Trade in services receipts and payments were generally normal Trade in services has recorded a long history of deficits, which indicated relative underdevelopment and structural problems in China s trade in services. In 2014, attracting popular attention, the deficit in trade in services increased by USD 67.5 billion to reach a total of USD 192 billion. In fact, China s trade in services has been in deficit since 1995 with the deficit expanding in the more recent years. The growth rate in the deficit of trade in services was 98 percent in The deficit in trade in services over the long term reflected that China remained relatively weak competitively and lacked a comparative advantage with respect to trade in services in 33

34 international markets. China s trade in services was relatively underdeveloped compared with its trade in goods, and the ratio of trade in services to trade in goods remained low for a long period of time. This ratio was recorded at one-seventh, whereas the average ratio in the developed countries was recorded at one-third. More significant was the underdevelopment in high value-added services. The increased deficit in trade in services in recent years reflected upgraded consumption due to the enhanced income of residents. Driven by ever-increasing resident income and the strong RMB exchange rate, residents overseas purchasing power was improving remarkably, and demand was surging due to the decreased costs for outbound travel, overseas study, and overseas online shopping. In recent years, the number of China s outbound tourists grew rapidly, totaling over 100 million persons in 2014 for the first time, a growth of 18 percent year on year (see Chart C3-1). Increased outbound tourists and their consumption led to continuous increases in travel payments. According to the statistics of the World Tourism Organization of the United Nations, China has been the top country for international tourism consumption since In 2013, China s outbound tourism consumption amounted to USD 129 billion, which was USD 42 billion more than U.S, consumption, it represented growth of 26 percent from 2013 which had increased by 40 percent year on year. Domestic residents have been enjoying the benefits from the reform and opening up strategy. Chart C3-1 Inbound and outbound tourism, Source: China National Tourism Administration 34

35 The facilitating measures increased trade in services payments, especially with respect to outbound tourism. With the rapid opening up and strengthened national power, the destinations of Chinese residents outbound tourism continued to increase and many countries and regions introduced preferential policies, such as visa-free policies, visas on arrival, and private tour to attract Chinese tourists. Related foreign exchange reforms, including enhanced limits on individual foreign exchange purchases, simplified approval procedures, and overseas consumption via credit cards and third party payment institutions, and guaranteed foreign exchange purchases of overseas consumption via credit cards were introduced. In the meantime, the SAFE implemented measures to prevent cross-border capital flow risks. For instance, when necessary single receipts or payments over USD 50,000 had to be reviewed with transaction documents and were subject to on-the-spot verifications and reviews. The deficit in trade in services was favorable for the balance-of-payment macro-control targets. In 2014, according to the BOP statistics, the surplus in trade in goods increased by 32 percent year on year, but its increase was offset by the expanded deficit in trade in services. The total surplus of trade in goods and services was USD 284 billion, the growth rate of which decreased to 21 percent year on year, and the ratio of the surplus to GDP was 2.7 percent. The current account surplus was reasonable (see Chart C3-2). Chart C3-2 The ratio of the balance trade in goods and services to GDP, Sources: SAFE, NBS 35

36 (III) Direct investments Net inflows of direct investments decreased slightly. In 2014, according to the balance-of-payment statistics, direct investment inflows and outflows totaled USD billion and USD billion respectively, growing by 14 percent and 39 percent year on year. Direct investment net inflows totaled USD billion, down by 4 percent. In 2014, the sum of the current account balance and the direct investment balance (i.e., the basic BOP balance) was USD billion, growing by 17 percent year on year and accounting for 4.1 percent of GDP, which was an increase of 0.3 percentage point from the ratio in China was further strengthened against capital flow shocks (see Chart 2-8). Chart 2-8 The ratio of the basic BOP balance to GDP, Sources: SAFE, NBS Net inflows of inward direct investments (FDI) remained stable. In 2014, net inflows of FDI totaled USD billion, decreasing 1 percent year on year (see Chart 2-9). FDI inflows amounted to USD billion, up by 10 percent. In particular, equity investment inflows totaled USD 36

37 145.6 billion, profit reinvestment inflows totaled USD billion, and other capital inflows (including loans and C/A payments between foreign-funded enterprises and their overseas affiliates) totaled USD billion, \an increase of 4 percent, a decrease of 10 percent, and an increase of 72 percent year on year respectively. FDI outflows totaled USD 90.6 billion, up by 70 percent year on year. In particular, the outflow of loans and C/A payments with overseas affiliates totaled USD 73.4 billion, up by 107 percent. Under the circumstance that China had to deal simultaneously with the slowdown in economic growth, to make difficult structural adjustments, and to absorb the effects of the previous economic stimulus policies, foreign capital was still confident about long-term investment in China. In addition, the difference between the domestic and foreign markets regarding the financing environment and the impact of costs on the financial behavior of domestic enterprises with their overseas affiliates (see the 2014 Monitoring Report on China s Cross-Border Capital Flows, part 2, direct investments). Chart 2-9 Inward direct investments, Source: SAFE 37

38 Outward direct investments (ODI) continued to grow rapidly. In 2014 ODI outflows and inflows amounted to USD billion and USD 55.5 billion respectively, growing by 24 percent and 53 percent year on year and reaching a net outflow of USD 80.4 billion, or growth of 10 percent (see Chart 2-10). In terms of sectors, the financial sector recorded a net ODI outflow of USD 11.6 billion, down by 26 percent year on year, with the main source from the banking sector where overseas equity investment decreased by 46 percent to USD 3.3 billion. Net outflows of the non-financial sector totaled USD 68.9 billion, up by 20 percent, reflecting that Chinese enterprises were going out rapidly with relatively concentrated industries and destinations (see Chart 2-11). Mergers and acquisitions by domestic enterprises in overseas market were developing significantly. In 2014 Chinese enterprises were actively involved in mergers and acquisitions in industries such as energy and mining, manufacturing, and agriculture. For instance, the enterprise consortium with MMG Limited acquired Las Bambas in Peru, State Grid acquired CDP RETI, the Legend Group acquired the mobile business of Motorola, DFM acquired PSA Peugeot Citroen, and so forth. In particular, the acquisitions of the Noble Group and of Nidera by Cofco were the two largest two overseas agricultural investment projects. 38

39 Chart 2-10 Outward direct investments, Source: SAFE Chart 2-11 The 2014 distribution of outward direct investments by non-financial sector in terms of industries and destinations Source: SAFE (IV) Portfolio investments Portfolio investments maintained a surplus. In 2014 net inflows of portfolio investments amounted to USD 82.4 billion, an increase of 56 percent year on year (see Chart 2-12). Since 2011 when the United States and the European countries were still suffering from the sovereign debt 39

40 crisis, China s portfolio investment had recorded a net inflow for three consecutive years due to the growing inward portfolio investments. Different from the other economies with huge amounts of capital inflows and outflows, increased inward portfolio investments indicated that the Chinese capital market was becoming more attractive against the background of steady economic growth with an improved infrastructure and further opening. Chart 2-12 Net flows of cross-border portfolio investments, Notes: Positive outward portfolio investments refer to net inflows, otherwise net outflows. Positive inward portfolio investments refer to net inflows, otherwise net outflows. Source: SAFE Outward portfolio investments were developing rapidly on the basis of a small scale. In 2014 net outflows of outward portfolio investments amounted to USD 10.8 billion, twice the amount of net inflows in Along with the warming of overseas capital markets, especially the USD bond market, domestic entities enthusiasm about outward investment 40

41 was rising. In terms of investment categories, the amount of outward equity security investments and the amount of bond investments stood at roughly the same scale, but the latter recorded a higher net outflow. Net outflows of bond investments totaled USD 9.4 billion, while net outflows of equity security investments totaled USD 1.4 billion. The preference for bond investments indicated a lower risk preference by domestic entities and increasing risk aversion. In terms of the investment entities, the banking sector increased its outward bond investments, with net outflows at USD 3.2 billion, an increase of 3.8 times over the net outflows in In addition, the net outflows of QDIIs totaled USD 9.6 billion, a 1.1 time increase over the outflows in 2013 and a historical high since the 2008 financial crisis. Inward portfolio investment surged remarkably. In 2014 net inflows of inward portfolio investments amounted to USD 93.2 billion, up 60 percent year on year. In particular, portfolio equity investments recorded net inflows of USD 51.9 billion, and portfolio bond investments recorded net inflows of USD 41.3 billion, up by 59 percent and 61 percent respectively. There were three major sources of investment channels. The first source was QFIIs and RQFIIs whose investments grew rapidly due to the increased investment quota, and the total net inflows of QFIIs and RQFIIs amounted to USD 25.3 billion, up by 51 percent year on year. The second source was RMB investments in the domestic interbank bond 41

42 market by foreign institutions, with the net inflows amounting to USD 32.9 billion. The third source was money raised from H-share by domestic institutions who issued stocks on the Hong Kong Market, totaling USD 34.2 billion and recording growth of 98 percent year on year. (V) Other investments Other investments changed from net inflows in the first half of the year to net outflows in the second half of the year. Other investments are an important factor influencing China s BOP status. In 2014 other investment inflows accounted for 77 percent of the capital and financial account inflows, and their outflows accounted for 88 percent of the capital and financial account outflows. Other investments frequently change between surpluses and deficits due to uncertainties both domestically and internationally, indicating rising volatility and procyclicality. In 2014 other investments recorded net outflows of USD billion, whereas in 2013 they recorded net inflows of USD 72.2 billion. In particular, loans, net outflows of currency and deposits, and trade credits came USD billion, USD 78.3 billion, and USD 70.8 billion respectively, and the other items recorded net inflows of USD 4.4 billion (see Chart 2-13). 42